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HomeStrategyGrowthGrowth Through Well Planned Investment

Growth Through Well Planned Investment

Growth is an important business strategy; many advantages flow from being bigger. Size brings with it many savings, e.g. an ability to buy at a lower cost in bulk and to spread the company’s fixed cost base over a far larger output. This allows the company to create leverage and improve the return on its asset base, achieving economies of scale. Some businesses are much better placed than others for growth.

A business can grow through:

  • Internal growth – funded by investing profits back into the business and issuing new shares or borrowing as a source of cash, to expand and improve the existing assets.
  • External growth – by acquiring an existing business, e.g. Sofa Workshop. Acquisition is a speedy form of growth. The acquired businesses can be integrated into the existing operation thereby providing synergy from their combination.

MFI has pursued both internal and external growth.

a) Developing and selling new products

MFI’s strategy is to ‘provide furniture for every room in the home’. It looks to ensure that every year at least 20-25% of its products are new ranges. To support this goal the company invests significantly each year in product design and introduces, customers, bathrooms, refits, bedrooms, design, stores, market, kitchens, appealing, floor, Refitting, prices, delivery, importance action. New product introduction is vitally important for the continued appeal of MFI’s products and MFI is continually trying to cater for customers’ ever increasing expectations and address the customers’ needs and concerns. Storage, for example, is becoming an increasing issue for a lot of homes. Think of your own bedroom and the importance of storing your clothes, music centre and associated CD collection, your television, computer and the many other items you own. A typical MFI designed bedroom is shown below:

b) Entering new product categories

MFI has developed a strong presence in bathrooms as well as in its more established areas such as kitchens and bedrooms. In bathrooms in particular, this was a product category that up until two years ago was not provided by MFI. This was despite 60% of customers thinking MFI did sell bathrooms. Bathrooms are a perfect fit with kitchens and bedrooms, where MFI recognises that customers require support with design, delivery and fitting. So MFI provide, at mass market prices, high quality, full room solutions including:

  • the product(s)
  • planning and advice
  • delivery
  • finance arrangement
  • installation service.

Because MFI is the market leader it can provide a fully tailored service at competitive prices. MFI sees bathrooms and kitchens, for example, as more than just functional spaces. Its designs treat these areas as showpieces: clean, hygienic areas that appeal to customers’ senses and enable them to make best use of space and time. Detailed market research has enabled MFI to provide what customers say they want.

c) Refitting retail outlets

A store’s trading format is vital. It needs to be convenient and attractive to consumers and to address their needs and concerns. MFI has invested extensively in store refits. The new look stores are visually appealing and elegant, with a focus on providing style and service. Fewer product ranges are offered but those selected are targeted at relevant customer groups. The purpose of the refit has been to increase sales per square foot of floor space and to ensure maximum efficiency in the supply chain.

Some MFI stores have been completely refitted while others have had a partial refit. Important features of complete refits have been architect-designed layouts, an open ceiling in the middle of the floor, large external windows, new heating, ventilation and lighting as well as a complete stripping out and reshaping of product displays.

MFI’s external growth has involved identifying businesses that match its goals. In the UK, the company mission is:

“To offer UK homeowners the biggest range of branded kitchens, bedrooms and associated products at unbeatable prices; all delivered free with a full range of design, installation and credit facilities.”

MFI wants to help each customer live a better life in their home by offering full room solutions for every room. As with bathrooms, up until two years ago MFI did not sell sofas, despite 60% of all customers thinking that it did. With this strong perceived awareness and in keeping with its strategy for growth MFI started to sell sofas on a concession basis with The Sofa Workshop Company in 2001.

MFI piloted the sale of sofas in a handful of stores to confirm the research that customers would buy from MFI. The initial pilot proved successful and the next step was to take the new category introduction into the test stage. This involved introducing sofas into a greater number of stores to confirm the pilot results. This strategy of Pilot, Test, Invest is consistent with all investments MFI undertake. The next stage for sofas was invest.

In 2002, MFI acquired The Sofa Workshop Company and the Sofa Workshop brand, with its 26 High Street stores, as well as a mail order and Internet business. This has enabled MFI to introduce a quality branded sofa product into its stores.

Through MFI there is substantial growth potential for Sofa Workshop sofas. MFI have the advantage of national coverage and access to more customers through the awareness of the MFI brand and the higher customer flow through their out of town stores. Consumers’ expenditure on the home is estimated to grow from 20.4% of total retail expenditure in 1991 to 29.0% in 2006. This compares to food and clothing which both decline as a percentage of total expenditure over the same period. The purchase of lifestyle enhancing sofas and other luxury products is an important part of this growth.

The acquisition of Sofa Workshop resulted from a careful SWOT analysis involving an examination of that company’s strengths and weaknesses coupled with an examination of opportunities and threats in the wider business environment.

Strengths were headed by the Sofa Workshop brand name – the established leader in design, quality and marketing. Another was Sofa’s Workshop’s resources, including:

  • an excellent management team
  • highly skilled, loyal employees, with years of experience in top quality sofa production
  • distribution channels that complemented MFI’s i.e. direct mail, retail outlets and sophisticated use of e-commerce.

These strengths needed to be balanced against Sofa Workshop’s weaknesses, including:

  • limited factory capacity
  • making products that people buy mainly when their incomes are rising and which they can postpone buying when the future looks less optimistic.

At the same time there were a number of exciting market opportunities, and chiefly the British public’s increased home-fashion orientation. For MFI, the acquisition offered the opportunity of broadening its category product range and build on the strategy of offering full room solutions for every room in the home.

Obvious threats included the existence of market rivals (e.g. DFS) and the possibility that more competitors might enter the market.

Sofa Workshop sofas are now available in around 200 MFI stores (a tenfold expansion of the market presence of Sofa Workshop products). Upholstery makes up 25% of the overall furniture market (a segment nearly as large as kitchens, bedrooms and bathrooms combined). Sofas are a very profitable line, typically generating significantly more per retail square foot than other product categories.

Sofa Workshop’s established brand, quality products and management enterprise complement MFI’s new store layout, which displays design-led products in a creative, realistic way.

A business needs finance to fund growth. One source is the profits the business generates. However, if it wants to grow more quickly it can either issue new shares or seek funds externally, e.g. through bank loans. To be able to do these things, it must be attractive to investors. Raising capital through a share issue is expensive and becomes harder when you have borrowed from banks excessively and are faced with large interest repayments.

In the late 1990s MFI borrowed from external sources to finance growth. This generated high interest repayments and limited the company’s ability to pay dividends, making it unattractive to existing and potential new shareholders.

In 1999, MFI identified an important new source of finance to fund growth: sale and leaseback. Some freehold buildings were sold off and MFI then leased them back from the new owner.

In recent times MFI has been highly profitable. As a result of this, the £12.25 million acquisition of Sofa Workshop was financed entirely by internal cash flow. MFI’s astute financial management has therefore enabled the acquisition of a star new asset – Sofa Workshop.

The overall effect of MFI’s modernisation programme has been to increase profitability levels while at the same time increasing the Return On Capital Employed (ROCE) in the business. With increasing profits the business is able to:

  • generate the cash required to run the business on a day-to-day basis
  • create the profits that enable faster internal growth
  • make much better use of all the capital (funds) invested in the business.

The impact of the refit of the new store layouts and the development of the Sofa Workshop concept is having a positive effect on the profit and loss account with an important knock-on effect in strengthening the balance sheet.

  • The increased cash flow gives the business more working capital, i.e. short term funds coming in that can be used to pay off regular payments such as suppliers’ bills and reduce bank borrowings.
  • Higher profits add to the company’s reserves, which can be used to invest in still further future growth.

MFI continually seeks to maintain its strong position as market leader. To achieve this it needs to move forward and grow by giving customers more of what they want. This involves detailed market research and careful investment in brands, store layouts, products, and new technology, and in staff development. Growth has been financed in such a way as to secure the cash and the profits that will secure ongoing investment in being the market leader.

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